David Daokui Li: To address deep-rooted economic problems, we must effectively manage the government-market relationship
Originally published in Chinese by ACCEPT on March 21, 2022. Translated by ACCEPT.
Caijing Think Tank’s “2022 Global Economic Confidence Index” was released in Beijing on March 18. David Daokui Li, Director of Tsinghua University's Academic Center for Chinese Economic Practice and Thinking (ACCEPT), attended the launch event and delivered a speech.
Speaking on the short-term risk factors facing China's economy, Professor Li argued that there are three major risks that must be given high priority. The first is the Russia-Ukraine conflict, which most significantly affects the economy through the price of staple products. The second major risk is the pandemic, and the third is the impact of the Fed's interest rate hike on global finance.
Regarding this year's economic growth rate target of 5.5%, Professor Li stressed that it will require continued reliance on infrastructure power. He said that in the short term, the fiscal power to carry out infrastructure projects is something that the Chinese economy will need sooner or later. In addition, infrastructure can also stimulate the development of related industries, including home appliances and construction machinery. This development will continue to extend downward, allowing for the preservation of major market players in related industries through infrastructure investment, thus driving some employment, which is a short-term stability policy.
Professor Li said that over the past several years, China's economy itself has not grown vigorously enough, which cannot be attributed to the decline in population growth alone. He said that there are two major problems on a deeper level, which he hopes “can be adjusted and put in place over the next two years.”
The first task is to stimulate the vitality of the private economy. “If this is not solved, if there is unwillingness to address the private economy, and if we further relax policies and issue loans to the state-owned economy instead, which is not in many competitive industries, then how can we possibly revitalize the economy?” he said.
The second is to manage the relationship between the government and the market. To create enthusiasm for economic development within local governments, there must not be a conflict between the government and the market.
Professor Li concluded that the short-term risks should not be underestimated and must be carefully analyzed, but there is no need to panic, and we should be confident that such risks can be dealt with. More important is to focus on the long-term impetus for development and the necessary adjustments to the private economy and local governments. We must reconstruct the government-market relationship in order to stimulate the medium- and long-term vitality of the Chinese economy.
The following is a translated transcript of the speech:
Host: The next speaker is Professor David Daokui Li, Director of the Academic Center for Chinese Economic Practice and Thinking (ACCEPT) at Tsinghua University. He will deliver a speech titled, “China's economy responds to complex factors with steadfast pragmatism.”
David Daokui Li: Thank you to Caijing Think Tank, and congratulations on successfully releasing the “Global Economic Confidence Index,” which has many highlights and information points worthy of attention. It is deserving of study and repeated review by all of society.
I agree with what several guests have said before me, and due to time constraints, I will try to share my views relatively quickly.
What I want to say is that the Chinese economy is indeed facing a complex situation this year, and the direction it has taken this year has caused concern. What are the short-term risk factors facing China's economy that can be analyzed? What are the medium- and long-term factors behind these risk factors? Throughout our analysis, we provide some opinions and recommendations.
In the short term, there are three major risks that must be taken seriously. First, the Russia-Ukraine conflict that began at the end of February. When you look at it carefully, this conflict has certainly had an impact on the world economy. So far, this has mainly been through high commodity prices, including staple products such as oil. The second is the pandemic. At the end of last year, Caijing magazine held a seminar to discuss the economic situation in 2022, where I suggested that the pandemic is a gray rhino event. Now, it seems that the pandemic is not yet over. The third is the U.S. interest rate hike, which will certainly bring about a new round of impact on global finance. This will specifically affect China, as there will be a definite impact on our exchange rate. If the Chinese economy does not rebound more significantly by the second half of the year, this financial impact may be further exacerbated, leading to more pessimism from abroad about the Chinese economy.
In general, I believe that this year's 5.5% growth target is a relatively positive and high target. This year, I tend to think that if the war does not spread further, the pandemic does not take a turn for the worse, and the dollar interest rate hike does not cause huge financial turmoil, the 5.5% target is likely to be met. However, please note that this will be mostly dependent on infrastructure power. Throughout January, February, and the beginning of March, various news outlets have broadcast the momentum of several investment projects. In fact, this year's fiscal policy stimulus is very strong. Through the profits of the central bank, as well as the profits of financial state-owned enterprises that will be turned over, this year's fiscal force is very strong, which may allow us to do more. This year's 5.5% target can be met, but I think the way is not through short-term increases in vitality. Consumption may rise a little, and the automotive, home appliance, and new energy vehicle industries will gain momentum. These are the three major short-term risks.
While on the surface, it looks like we have suffered a hit and China’s economic macro policy has not been adjusted in place, in fact, the deeper problem particularly worthy of our attention is that over the past several years, the Chinese economy has not grown with enough vitality. I believe that we cannot place all the blame on the decline in population growth, as declining population growth is a slow variable, while this trend has been forming for a long time. In addition, China’s current employment structure is not the same as Western countries in that we have a significant number of migrant workers who are likely to work for longer rather than retiring immediately, since they will not be able to consume if their income decreases. Therefore, declining population growth is not a fast variable. I think to address the deep-seated problem of a lack of vitality, we must pragmatically respond to two issues, which I hope we can do within the next two years. First, to stimulate the vitality of the private economy. If this is not solved, if there is unwillingness to address the private economy, and if we further relax policies and issue loans to the state-owned economy instead, which is not in many competitive industries, then how can we possibly revitalize the economy?
Second, we have a long history of foundational experience in managing the relationship between the government and the market. When the government and the market are moving in the same direction, local governments will do everything in their power to pursue local economic development by creating the conditions for growth, including by repairing infrastructure, clearing land, etc. Now, there are numerous demands on local governments, with many departmental inspections and examinations. At the same time, the debt burden is relatively high. Just now, Director Li Yang showed us the data on local government debt. This data may be a little low, as our research team’s calculations are higher. When enterprises and households have high debt levels, they do not have leeway for medium- and long-term planning. The same is true for local governments. Therefore, the enthusiasm of local governments for economic development must be effectively created—this is the relationship between the government and the market. This is a distinguishing feature of the Chinese economy—the government cultivates the market and promotes its development. Ensuring that the government and market do not contradict one another is our second crucial task.
In general, the short-term risks should not be underestimated and must be carefully analyzed, but there is no need to panic, as we should be confident in our ability to cope. What is more important is to focus on the long-term impetus for development and the necessary adjustments to the private economy and local governments. We must adhere to the economic wisdom gained from the summation of China’s economic practice to reconstruct the government-market relationship and stimulate the medium- and long-term vitality of the Chinese economy.
Zhang Yandong: You mentioned that this year’s 5.5% growth rate target is still relatively high. Do you think that the main strength is in infrastructure investment? Is this rational or scientific for China’s economy in the long run?
David Daokui Li: It is appropriate from a certain point of view, since the short-term financial strength to carry out some infrastructure projects, sooner or later, is what the Chinese economy needs. In addition, infrastructure can spur the development of other related industries, including home appliances and construction machinery. This development will continue to extend downward, allowing for the preservation of major market players in related industries through infrastructure investment, thus preventing bankruptcy and driving some employment, which is a short-term stability policy. If the Chinese economy is to recover its previous vitality, I think that problems in the relationship between local governments and the private economy must be addressed.